Late delivery

1H23 RESULT

Need To Know

• ~7% miss to EBIT ($113.9m vs ~$123m)
• Guidance lowered to be ‘below medium-term target of 8-10% store growth and 3-6% same store sales growth’
• 67.4cps dividend lower than expected (73.0cps)

The result was missing a few toppings, largely because of slowing macroeconomic conditions impacting sales growth (-4%, +1.2% cc) and -0.6% in same store sales (SSS). Earnings were -21.3% lower, affected by lower than anticipated sales and the flow-on effect on corporate stores and warehouse earnings. DMP continues to balance its value equation and is working through pricing strategies, which we expect will take some time to work through.

Short-term headwinds from inflation, saw higher DMP introduce higher delivery pricing, which reduced customer acquisition and retention rates, and customer counts have not met expectations since December, especially in Europe and Asia. December EBIT was particularly impacted in Japan due to immature corporate stores in regional locations. Warehouse earnings were impacted by lower volumes and a delayed pass through of higher COGS. The 1H23 result also included one less trading week than 1H22.

Franchisee profitability has been falling, with EBITDA per store down ~23% to $101.1m, with margins falling 230bps to just 7.5%. This has significantly impacted the store rollout, with new organic store growth rising just +2.4%, below its 3% target. We expect the lower profitability to continue as DMP cycles through inflationary pressures and a weaker macro backdrop.

The balance sheet has slightly worsened, with net debt rising $95.8m to $666.5m, primarily because of higher borrowings relating to the Malaysia and Singapore acquisitions, partly offset by the $163.2m capital raise in 4Q2022. Leverage has risen to 2.1x but is well below the 3.0x covenant. 

Year to date trading through to 19 February has been weak, with SSS falling -2.2%. Guidance has been sliced, with management anticipating FY23 SSS to be below the 3–5 year target of 3-6%, and also expect store openings to be below the 3-5 year target of 8-10%.

Investment View

We had anticipated a weaker result, however the magnitude and the cautious outlook was worse than our expectations. The market will likely downgrade FY23 earnings by ~10-15%, with some flow on to FY24, with commodity and labour increases continuing to impact the business. Despite an already significant fall from its peak, trading at ~33x PER, the company was priced close to perfection. Clearly the result is a speedbump in an otherwise sound long-term growth strategy. Without a clearer pathway return to franchisee profitability, we view the growth strategy as under risk in the short-term and retain our Hold recommendation for now.

Figure 1: Europe and Asia largely impacting the result